Here is our suggested bequest language for use by our donors and advisors.MORE

Thursday March 21, 2019

Washington News

Average Income Tax Refund Up 1.3%

On February 28, the IRS reported an increase in tax refunds. The average 2019 refund amount of $3,143 is 1.3% higher than last year's average. The increased refunds reflect tax returns that claimed the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC).

Most taxpayers who file electronically receive a tax refund within 21 days. If a paper tax return is filed, the refund may be delayed for six weeks or longer.

For the approximately 21% of taxpayers who will owe additional tax this year, the Service reminds them that payment is due by April 15, 2019 (with the exception of Maine and Massachusetts residents who must pay by April 17, 2019). If taxpayers cannot pay the full amount, there are four options approved by the IRS.

Online Payments - Individuals owing $50,000 or less and businesses owing $25,000 or less may qualify for an Online Payment Agreement. Taxpayers may apply on IRS.gov by clicking on "Apply Online for a Payment Plan."

Installment Agreement - Taxpayers who do not qualify for an Online Payment Agreement, may be able to set up an installment payment plan. With the installment agreement, a taxpayer will often have payments made directly from his or her bank account or through a payroll deduction.

Delayed Collection - The IRS may consider economic circumstances and permit a delay in payments. Taxpayers will need to contact the IRS personally to discuss this collection alternative.

Offer in Compromise - Taxpayers may offer to settle a tax debt for less than the stated amount. Go to IRS.gov and use the Offer in Compromise Pre-Qualifier tool. In a limited number of circumstances, the IRS may accept a reduced tax payment amount.

In 2004, the Palmolive Building Investors LLC (Palmolive) granted a façade conservation easement on the Palmolive Building to the Landmarks Preservation Council of Illinois (LPCI). Palmolive claimed a $33.41 million charitable deduction.

The Service denied the deduction. Subsequently, the Tax Court sustained the Service's denial because the two mortgages on the Palmolive Building were not properly subordinated to the façade easement. Palmolive Bldg. INV'rs. LLC v. Commissioner, 149 T.C. 380 (2017). As a result, the gift failed the "perpetuity" requirement of Reg. 1.170A-14(a).

The taxpayer claimed the four penalties were invalid due to the IRS' failure to comply with the immediate supervisor requirement under Sec. 6751(b)(1). This provision states, "No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination."

The Tax Court reviewed the factual basis for the penalties and concluded, "The undisputed facts show that each of the four penalties at issue in this case was initially determined by an individual who obtained his supervisor's written approval before the penalty determination was communicated to Palmolive."

The Tax Court then upheld the penalties. It continued, "The IRS complied with Section 6751(b)(1) because each penalty at issue here was 'initially determined' and then approved in writing by a supervisor before being communicated to Palmolive."

Editor's Note: The Service continues to scrutinize all conservation easements. The loss of the $33.41 million tax deduction, plus the major penalties assessed show that failure to be in full compliance with the conservation easement requirements may be an extremely costly mistake.

LIFT Act to Repeal Parking Tax

On February 28, Sen. Chris Coons (D-DE), Sen. James Lankford (R-OK) and Rep. Mark Meadows (R-NC) introduced the Lessening Impediments From Taxes (LIFT) Act in the House and Senate. This bill would repeal the Sec. 512(a)(7) unrelated business income tax (UBIT) on nonprofits' employee parking lots.

The senators and Rep. Meadows emphasized that there is bipartisan support for repeal of the nonprofit parking tax. Coons stated, "Nonprofits are organized around a cost, mission, or community need, and employees of nonprofits often have the same access to parking and meals that others in the community have because the nonprofit serves the whole community. Requiring these organizations to pay a federal tax on these employee benefits, something they have never been required to do before, will cause them to not only face an increased operating cost, but an administrative burden."

Lankford continued by stating his support. He noted, "Due to a provision in the tax reform bill, the law now requires some churches and some nonprofit organizations to pay new employee benefit taxes. Most nonprofits are not equipped to handle the additional compliance burden."

Nonprofit associations joined in the effort to repeal the parking tax. Tim Delaney, President and CEO of the National Council of Nonprofits, stated, "Taxing tax-exempts is the very definition of an oxymoron. But worse, this tax is also illogical, unworkable and unfair. Almost everyone in Congress acknowledges it was a mistake, an error and this legislation shows there is bipartisan support for its repeal."

Gene Cochrane is the Interim President of the Council on Foundations. He explained, "This and the other new UBIT taxes impose significant cost and record-keeping burdens on charitable nonprofits, making it harder for these organizations to fulfil their charitable missions and more difficult to recruit and retain the needed talented employees. Without the requested action, the likely outcome is that many nonprofits will simply eliminate any employee transportation fringe benefits, resulting in a great reduction of the anticipated new tax revenue for the U.S. Treasury."

Editor's Note: Thousands of nonprofits who have never previously filed IRS Form 990-T are now busy assessing the cost of their employee parking services. Under Notice 2018-99, many will have over $1,000 in unrelated business income and must pay tax this year.

The IRS has announced the Applicable Federal Rate (AFR) for March of 2019. The AFR under Section 7520 for the month of March is 3.2%. The rates for February of 3.2% or January of 3.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.